Schweizerische Luftverkehrs AG, also known as Swissair or SAir Group was founded on March 26, 1931 in Switzerland. Since the very beginning of its era, Swissair has been very successful in managing and implementing its strategies, and also winning the best airline award for decades. The company had a period of growth (Appendix 1) and grew rapidly till the mid 90s, after which there was an executive board members restructuring which caused a major turn of events in the companys history. Switzerland being an expensive destination for a business venture with rising costs and a population of only 7 million people, Swissair was aware of its limited growth potential in the domestic home market. Therefore during the period of mid 90s, Swissair adopted an equity based alliance strategy, also referred as the hunter strategy. The main aim of Swissair was to create an alliance with Europes other non-dominant airline firms and become efficient enough to compete with other stronger alliances. This alliance was called Qualiflier. To make the alliance successful, Swissair bought small stakes in Air Littoral, Air Europe, Volare Group, LTU, AOM Minerve, LOT, South African Airways, TAP and Air Liberte, operating in Austria, Hungary, Finland, Ireland, Africa and many more. The biggest and worst investment decision made by Swissair in that period was buying equity in a Belgium carrier called Sabena. Sabena had posted a profit only twice in the entire companys history. These were bad investment decisions as all the firms except LOT and South African airlines posted a loss in the year of their acquisition, nor were they dominant players in their home markets. In this report, these failed strategic alliances are analyzed using Lasserres (2007) framework and theoretical models. Recommendations are made based on these findings, to illustrate how Swiss Air could have avoided bankruptcy.

Contents

Introduction

The concept of two or more companies collaborating for mutual benefits through the formation of a strategic alliance has become more lucrative over the years and several airline companies have adopted this expansion strategy to gain a competitive advantage in a highly saturated market (Evans, 2001). Swiss Air was one of the companies that fell prey to the perils of risk laden strategic alliances. In the mid 1990s the European Aviation market was deregulated and various airlines began entering into strategic alliances so that they could facilitate growth by sharing their resources (Knorr and Arndt, 2004). Around the same time, a majority of the Swiss population voted against Switzerlands accession to the EEA (Knorr and Arndt, 2004). This hindered the companies objective to expand and grow in the European market, and led to the formation of an equity based alliance strategy, also dubbed as the Hunter Strategy (Suen, 2002). Swiss Air had always been a company that was averse to risky strategic choices, however in the course of diversifying their risk, the company made some questionable strategic decisions that increased their risk and made them more vulnerable to their investments financial performance (Suen, 2002). In this report Swiss Airs failed strategic alliances are analyzed and the key factors for the cause of failure are identified. These factors are highlighted by financial and performance data that helps us understand the major cause of Swiss Airs downfall. Various management issues coupled with bad investment decisions led to the failure of companies strategic alliances, however there were a few external factors that catalyzed the collapse of the Flying Bank (Evans, 2001). Based on the faults and errors committed by Swiss Air, few recommendations are listed in the report to underline what kind of strategic approach could have aided the company to successfully form a Global Reach Alliance (Lasserre, 2007).

Problem Identification

During the period of deregulation of the airline industry in Europe, major airlines were looking to form strategic alliances with various airlines in order to share their resources and capabilities, in the process gaining a competitive edge in the market. Swiss Air was one of the airlines that boasted the healthiest bank balance and was renowned for its safety and reliability (Knorr and Arndt, 2004). On December 1992 Swiss Air received an unexpected blow as 50.3 percent of the Swiss population voted against the inclusion of Switzerland in the European Economic Union (Chang and Williams, 2002). Due to the comparatively small population of Switzerland and low scope for growth, Swiss Air shifted its focus to Europe, with a strategic aim of holding 20 percent market share (Knorr and Arndt, 2004). This objective was to be achieved by using the Hunter Strategy, an equity based strategy developed by McKinsey (Knorr and Arndt, 2004). This would allow Swiss Air to purchase equity stakes in smaller and less known carriers and create an independent alliance with these companies. This would help the company compete with some of the larger alliances dominant in the European market. The three generic strategies for airlines are growth, focus and low cost strategy (Kleymann and Seristo, 2004). According to strategic context and value potential this new growth strategy was not incorrect, however the implementation of the strategy was flawed (Suen, 2002). Using Philippe Lasserres (2007) framework for analysis we can identify the stage at which Swiss Air faced a roadblock and had to declare bankruptcy.

After the failure of its early alliances, European Quality, Global Excellence and Atlantic Excellence, Swiss Air learnt from its mistakes and decided that deeper integration along with ownerships and control would provide them with natural exit barriers (Suen, 2002). The Hunter Strategy led to the creation of Qualiflyer, a European based alliance consisting of carriers like Austrian, Sabena, AOM France, Crossair, Lauda Air, TAP Portugal, and THY Turkish Airlines (Appendix 3) (Suen, 2002). Qualiflyer would provide Swiss Air the global reach and transnational flexibility that a global carrier required to remain competitive in the market (Bartlett and Ghoshal, 1989). The competitive forces and prevalent factors in the industry pressurized Swiss Air to form a group alliance with these carriers. Swiss Airs major flaw in the implementation of this strategy was their failure to assess the strategic value of these equity-based alliances (Lasserre, 2007).

The failure to create and capture value through an alliance is illustrated in Swiss Airs purchase of 49.5 percent equity stake in the Belgian airline Sabena, which was later increased to 85 percent. This equity-based investment was done knowing that they were breaching European laws that stated that a non-EU-based investor couldnt acquire more than 49.5 per cent share in a EU-based airline. Not only did they breach the law, they also agreed to compensate the Belgian Government for any damages they incur (Knorr and Arndt, 2004). This equity-based alliance was the worst as Sabena had always been a loss-incurring airline and it proved to be a major liability to Swiss Air.

Qualiflyer operated on a hub-and-spoke system, which meant that there were no bilateral agreements in the alliance and all members were required to contract any of their services to a Swiss Air, owned subsidiary. This in turn greatly increased the cost of an exit strategy as Swiss Air needed to inject large sums of capital into its financially weak partners in order to ensure Qualiflyer could create value (Knorr and Arndt, 2004). Apart from the implementation of the Hunter Strategy, there were a few fundamental flaws that led to the termination of Qualiflyer. This alliance damaged the companys brand image by primarily choosing second and third-rate carriers as partners. These carriers had previously been avoided by the other large alliances due to their inability to turn a profit (Knorr and Arndt, 2004). The September 2001 attack in USA was the nail in the coffin for Swiss Air as it marked a period of hardship for all airlines, leading to great losses in revenue.

Swiss Airs unsuccessful alliance strategy was the main cause for the companys downfall, however there were certain external factors that made survival for the company extremely difficult (Suen, 2002). The Swiss vote against joining the EEA was the factor that led to the formulation of the hunter strategy.

Strategic Recommendations

Swiss Airs catastrophic downfall tarnished the image of their brand, led to the loss of thousands of jobs; stranded hundreds of people at airport and most importantly hurt the pride of the Swiss People (Knorr and Arndt, 2004). A string of bad business decisions coupled with external factors in the airline industry caused Swiss Air to lose their cash flow. In order to determine how such a crisis could have been avoided, Lasserres (2007) framework for analysis of strategic alliances will be applied. After identifying the companys strategic and operational issues, it can be determined that they went wrong on most stages of the framework. The Hunters Strategy would have succeeded in the strategic context if they had assessed the value potential of this alliance (Hayes, 1996).

The Qualiflyer Alliance was fundamentally a coalition alliance, where Swiss Air would get a more global reach in the industry by combining the members resources and capabilities. Swiss Air strived to create a certain standard of service for its passengers that would inculcate their values of punctuality, safety and luxury (Lasserre, 2007). However this was not possible, as they had chosen second and third-grade carriers, which in turn affected their own brand image. They should have carefully chosen their partners, using certain tools to ensure success. This is discussed in detail later in the report. Subsequently, they failed to challenge any of the larger alliances in Europe at that point in time. This takes us to the second factor in the framework, which deals with partners fit (Lasserre, 2007). This stage in the framework evaluates the viability of the strategic alliance. As stated earlier in the report, Sabena was a loss-making airline in the start and by choosing to purchase 49.5 percent equity in the company Swiss Air made one of their worst financial investments. Year after year, Sabena kept incurring a loss, which drained a lot of capital from Swiss Air (Knorr and Arndt, 2004). It can be determined that Sabena was not a good strategic fit for Swiss Air and proves that they should have conducted an effective partner analysis (Lasserre, 2007). Swiss Air chose to enter into equity-based alliances with several carriers so they had a certain degree of control (Hermann and Rammal, 2010).

In order to distribute and diversify their risk, they ventured into several other fields such as hotels, catering and aircraft maintenance (Knorr and Arndt, 2004). All in all they had around 252 subsidiaries (Appendix 2) under their companys name (Knorr and Arndt, 2004). The various subsidiaries and financially weak partners drained a lot of their capital reserves, which eventually led to a strain on their cash flow. A much leaner organizational structure would have assisted the effective management of resources and capital. The final factor in Lasseres (2007) framework deals with the implementation of the strategy. This is where the company faltered the most and part of the blame can be put on their current board members managerial decisions at that time (Hermann and Rammal, 2010). A lot of their bad investment decisions could have been avoided if the board consisted of members who were well versed with the intricate workings of the airline industry (Hermann and Rammal, 2010). Their Hunter Strategy was devised with the consultancy services provided by McKinsey & Co, a US based company, which did not have the adequate knowledge of the European Airline industry (Hermann and Rammal, 2010). There was a restructuring of the board and all members who recognized the threats to Swiss Air were removed (Hermann and Rammal, 2010). The shortcomings and mistakes made by the board can be analyzed by the Resource Dependence theory, which illustrates how the external resources in the industry affected their decisions (Casciaro and Piskorski, 2005). The Resource Dependence theory and Group Conformity theory explain how the board pulled out of a potential alliance with a large European carrier due to their hesitance over the degree of control they would have (Hermann and Rammal, 2010). This illustrates the inexperience and lack of knowledge within the newly structured board, especially how the members allowed the Hunter Strategy to be implemented because they did not want any disruptive behavior within the board (Hermann and Rammal, 2010). Swiss Air should have strictly followed the critical success factors for a successful strategic alliance so that they could focus on all aspects of the alliance instead of focusing on their scope of control (Hermann and Rammal, 2010). The best solution to prevent such problems from recurring would be to alter the laws and regulations within the EFTA to ensure no other company follows in the footsteps on Swiss Air. Legislative changes to corporate governance requirements should be made to ensure that the members of the board of an airline are experienced and have adequate knowledge of the dynamics of the industry (Hermann and Rammal, 2010).

Risk management is an important ability that is required in a company that has huge global exposure such as Swiss air, the ability to foresee and evaluate contingencies are required when it comes to alliances that were formed by Swiss Air. Swiss air could have given higher emphasis to risk management and contingency planning in order to be more efficient and competitive in the market (Lasserre, 2007). As stated above, major reasons of the bankruptcy were external factors, relating to macro-economic issues and an economic slowdown, Successful Contingency planning and evaluation of the economic risks could have averted these issues related to the economic deregulation (Lasserre, 2007).

Conclusion

Through the years the aviation industry has proven to be volatile and drastically changing, the aviation companies globally have had to adapt to the changes to help them fortify or maintain their position in a market. In the early 1990s the formation of the EEA was a pivotal factor for the liberalization of the laws in several countries within the European region, this proved to be an asset for countries within the region but Switzerland opted not to join the EEA (Knorr and Arndt, 2004). This decision negatively affected its national airline Swiss Air, who then attempted to maintain its position in the market by forming equity based strategic alliances. The company formed these alliances on the basis of the Hunter Strategy, the strategy theoretically poised to give optimistic results but the implementation is always crucial for the success, this is where Swiss Air faltered. The reason for the poor implementation would be largely due to inefficiency of the management team of the company, the management chose scope of control as a priority which led to the negligence of prioritizing the other factors that lead to a successful strategic alliance (Hermann and Rammal, 2010).

The company made grave errors and faced the consequences accordingly; to ensure that success is achieved for the company it must include people with experience and knowledge within the management. The company should also consider the possibility of circumstances where contingency planning would be required as there could be many unforeseen risks in the aviation industry.

A strategy is only effective if implemented correctly, Swiss Air made crucial mistakes in their decision making process, there was lack of contingency planning and several wrong investments. All these factors contributed largely to the downfall of the once reputed and respected Flying Bank.